Gift tax in the United States

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A gift tax is a tax imposed on the transfer of ownership of property. The United States Internal Revenue Service says, a gift is "Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return."[1]

When a taxable gift in the form of cash, stocks, real estate, or other tangible or intangible property is made, the tax is usually imposed on the donor (the giver) unless there is a retention of an interest which delays completion of the gift. A transfer is completely gratuitous, where the donor receives nothing of value in exchange for the given property. A transfer is gratuitous in part, where the donor receives some value but the value of the property received by the donor is substantially less than the value of the property given by the donor. In this case, the amount of the gift is the difference.

In the United States, the gift tax is governed by Chapter 12, Subtitle B of the Internal Revenue Code. The tax is imposed by section 2501 of the Code.[2] For the purposes of taxable income, courts have defined a "gift" as the proceeds from a "detached and disinterested generosity."[3] Gifts are often given out of "affection, respect, admiration, charity or like impulses.[4]

Generally, if an interest in property is transferred during the giver's lifetime (often called an inter vivos gift) then the gift or transfer would not be subject to the estate tax. In 1976, Congress unified the gift and estate taxes limiting the giver’s ability to circumvent the estate tax by giving during his or her lifetime. Notwithstanding, there remain differences between estate and gift taxes; such as the effective tax rate, the amount of the credit available against tax, and the basis of the received property.

There are also types of gifts which will be included in a person's estate; such as certain gifts made within the three year window before death and gifts in which the donor retains an interest, such as gifts of remainder interests that are not either qualified remainder trusts or charitable remainder trusts. The remainder interest gift tax rules apply the gift tax on the entire value of the trust by assigning a zero value to the interest retained by the donor.

Non-taxable gifts[edit]

Generally, the following gifts are not taxable gifts:[5]

Gift tax exemptions[edit]

There are two levels of exemption from the gift tax. First, gifts of up to the annual exclusion ($14,000 per recipient as of June 2013) incur no tax or filing requirement. By splitting their gifts, married couples can give up to twice this amount tax-free. Note that each giver and recipient pair has their own unique annual exclusion; a giver can give to any number of recipients and the exclusion is not affected by other gifts that recipient may have received from others.[7]

Second, gifts in excess of the annual exclusion may still be tax-free up to the lifetime estate basic exclusion amount ($5,340,000 in 2014), although for estates over that amount such gifts might increase estate taxes. Taxpayers that expect to have a taxable estate may sometimes prefer to pay gift taxes as they occur, rather than saving them up as part of the estate.

Furthermore, transfers (whether by bequest, gift, or inheritance) in excess of $1 million may be subject to a generation-skipping transfer tax if certain other criteria are met.

Further information: Estate tax in the United States

Tax deductibility for gifts[edit]

Pursuant to 26 U.S.C. § 102(a), property acquired by gift, bequest, devise, or inheritance is not included in gross income and thus a taxpayer does not have to include the value of the property when filing an income tax return. Although many items might appear to be gift, courts have held the most critical factor is the transferor's intent. Bogardus v. Commissioner, 302 U.S. 34, 43, 58 S.Ct. 61, 65, 82 L.Ed. 32. (1937). The transferor must demonstrate a "detached and disinterested generosity" when giving the gift to actually exclude the value of the gift from the taxpayer's gross income. Commissioner of Internal Revenue v. LoBue, 352 U.S. 243, 246, 76 S.Ct. 800, 803, 100 L.Ed. 1142 (1956). Unfortunately, the court's articulation of what exactly satisfies a "detached and disinterested generosity" leaves much to be desired.

Some situations are clearer, however.

  1. "Gifts" received at promotional events are not excluded from taxation:

For example, Oprah's seemingly good deed of giving new cars to her audience does not satisfy this definition because of Oprah's interest in the promotional value that this event causes for her television show.

  1. "Gifts" received from employers that benefit employees are not excluded from taxation:

26 U.S.C. § 102(c) clearly states employers cannot exclude as a gift anything transferred to an employee that benefits the employee. Consequently, an employer cannot gift an employee's salary to avoid taxation.

In addition, policy reasons for the gift exclusion from gross income are unclear. It is said no justification exists. It is also said the exclusion is for administrative reasons, both for taxpayers and for the IRS. Without the exclusion taxpayers would have to keep track of all their gifts, including nominal ones, during the year, and this would create additional oversight problems for the IRS.

Non-residents[edit]

For gift tax purposes, the test is different in determining who is a non-resident alien (NRA), compared to the one for income tax purposes (the inquiry centers around the decedent's domicile). This is a subjective test that looks primarily at intent. The test considers factors such as the length of stay in the United States; frequency of travel, size, and cost of home in the United States; location of family; participation in community activities; participation in U.S. business and ownership of assets in the United States; and voting. A foreigner can be a U.S. resident for income tax purposes, but not be domiciled for gift tax purposes.[8]

A non-resident alien (NRA) is subject to a different gift tax regime than a U.S. taxpayer. A NRA donor is not subject to U.S. gift taxes on any gifts of non-U.S. situs property given to any person, including U.S. citizens and residents. Citizens and residents, however, must report on Form 3520 gifts from a NRA that are in excess of $100,000. Gifts of U.S.-situs assets are subject to gift taxes, with the exception of intangibles, which are not taxable (for example, shares in U.S. corporations and interests in partnerships or LLCs). Tangible personal property and real property is sited within the United States if it is physically located in the United States. NRA donors are allowed the same annual gift tax exclusion as other taxpayers and are subject to the same rate schedule for gift taxes. However, the lifetime unified credit is not available to NRA donors.[8]

Noncitizen spouse[edit]

According to 26 USC section 2523(i), gifts to a non-U.S.-citizen spouse are not generally exempt from gift tax. Instead, they are exempt only up to the amount of ten times the annual exclusion foreseen by 26 USC section 2503 (b) (that is, up to $140,000 for 2013).

U.S. Federal gift tax contrasted with U.S. Federal income tax treatment of gifts[edit]

The treatment of a gift for U.S. gift tax purposes (the transfer tax) should not be confused with the treatment of gifts for other tax purposes. For example, for U.S. income tax purposes, most gifts are excluded (under Internal Revenue Code section 102[9]) from the gross income of the recipient, and thus are not taxed as income. For the purposes of taxable income, courts have defined "gift" as proceeds from a "detached and disinterested generosity." See Commissioner v. Duberstein (quoting Commissioner v. LoBue, 351 U.S. 243 (1956)).

Gifts from certain parties will always be taxed for U.S. Federal income tax purposes. Under Internal Revenue Code section 102(c),[10] gifts transferred by or for an employer to, or for the benefit of, an employee cannot be excluded from the gross income of the employee for Federal income tax purposes. While there are some statutory exemptions under this rule for de minimis fringe amounts, and for achievement awards, the general rule is the employee must report a “gift” from the employer as income for Federal income tax purposes. The foundation for the preceding rule is the presumption that employers do not give employees items of value out of "detached and disinterested generosity" due to the existing employment relationship.

Under Internal Revenue Code section 102(b)(1), income subsequently derived from any property received as a gift is not excludable from the income taxed to the recipient.[11] In addition, under Internal Revenue Code section 102(b)(2), a donor may not circumvent this requirement by giving only the income and not the property itself to the recipient.[12] Thus, a gift of income is always income to the recipient. Permitting such an exclusion would allow the donor and the recipient to avoid paying taxes on the income received, a loophole Congress has chosen to eliminate.

History[edit]

The gift tax is a back stop to the United States estate tax. Without the gift tax, large estates could be reduced by simply giving the money away prior to death, and thus escape any potential estate tax. Gifts above the annual exemption amount act to reduce the lifetime gift tax exclusion.[13] Congress initially passed the gift tax in 1932 at a much lower rate than the estate tax, a full 25% under the estate tax rate, while also providing a $50,000 exemption, separate from the $50,000 exemption under estate tax.[14] The benefits were clear: a $10,000,000 gift would be taxed only $2,300,000, effectively only 23.0%, well below the estate tax rate.[15]

The intention was to rapidly generate revenue in the Great Depression, effectively encouraging avoidance of the estate tax by doing so, while lawmakers at the same time publicly, and in both House and Senate, proclaimed the exact opposite objective.[16] Moreover, this was directly at the expense of state tax revenues, as well as of future federal tax revenues.[17] The primary beneficiaries were the wealthiest citizens, whom the estate tax was supposedly designed to target, since only they had cash enough to freely make large gifts.[18] This was the express intention.[19]

See also[edit]

References[edit]

  1. ^ Frequently Asked Questions on Gift Taxes, Internal Revenue Service
  2. ^ 26 U.S.C. § 2501.
  3. ^ Commissioner v. Duberstein, quoting Commissioner v. LoBue, 351 U.S. 243 (1956).
  4. ^ Duberstein at 285 (quoting Robertson v. United States, 343 U.S. 711, 714 (1952)).
  5. ^ "IRS Publication 950 - Introduction to Estate and Gift Taxes (PDF)".  (Rev December 2009)
  6. ^ Jacobs, Deborah L. (2012-10-18). "IRS Raises Yearly Limit For Tax-Free Gifts". Forbes. Retrieved 2013-01-07. 
  7. ^ "Estate and Gift Tax 2013". 2013-01-02. Retrieved 2013-08-17. 
  8. ^ a b Stein, Jacob. "Tax Planning for Foreign Investment in California Real Estate". Los Angeles Lawyer. Retrieved March 15, 2013. 
  9. ^ 26 U.S.C. § 102.
  10. ^ 26 U.S.C. § 102.
  11. ^ 26 U.S.C. § 102.
  12. ^ 26 U.S.C. § 102.
  13. ^ [1]
  14. ^ Cooper, Jeffrey A. "Ghosts of 1932", in Florida Tax Review (Vol 9, Number 10, 2010), p.913.
  15. ^ Cooper, pp.913-914.
  16. ^ Cooper, pp.912-913.
  17. ^ Cooper, p.914.
  18. ^ Cooper, p.915.
  19. ^ Cooper, p.915 fn 171.

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